Deutsche Telekom and France Telecom — Can Procurement Mergers Work? (Part 2)

In the first part of this post, we shared some of the details of Deutsche Telekom and France Telecom's announced procurement "merger." In Spend Matters' view and experience, the notion of fully centralizing purchasing for key categories within a single company with diverse, global operating units is often tricky, let alone attempting to do so across organizations and cultural borders. Often times, the consulting firms that work on procurement transformation design and initial strategy can fail to take into account such areas as payment terms/working capital goals, even across divisions of a single company. For example, an adviser may look at an opportunity to "rationalize" payment terms to Net 60 or Net 90 based on what one division has been able to negotiate, without realizing that in certain countries and regions, these actions are likely to damage supplier relationships and result in higher prices at the SKU level as suppliers find ways of making up for the higher cost of doing business.

Another area that strategy and organizational procurement design types as well as consultants overlook when envisioning programs that pool spend are the value added programs that suppliers may be providing on the divisional or even site level (let alone across companies). For example, a supplier may be managing a just-in-time (JIT) or vendor managed inventory program on behalf of a customer, resulting in a higher item-level cost, but a lower total cost of ownership -- thanks to reduced inventory carrying costs -- as well as better overall procurement/supplier responsiveness and agility based on business-defined KPIs outside of cost. I feel sorry for the shared service or centralized program and category leads of a company or organization tasked with getting buy-in from plant managers and different facilities in terms of rationalizing their individual expectations and value-added programs they've enabled with key suppliers.

Such problems are likely to compound themselves in a procurement joint venture between organizations that crossed borders. Even on the most basic area; take lead-time, for example. Adding 1-2 weeks of lead-time as part of a leveraged agreement may sound like a fair trade-off, but this maneuver can wreck havoc with the business itself, especially in areas like service parts and capital equipment (both huge outlays in a telecom environment). In short, the notion of pooling spend often sounds great during a 100 slide presentation by polished consultants, but when it comes to implementing the results in the field, there's often material risk to the business.

Now that we've examined the negatives associated with such a venture, it's time to accentuate the positives -- or at least potential benefits. Stay tuned for the concluding post in this series.

Jason Busch